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Housing Bubble Bust? FDIC Hopes Not

The study concluded that a housing boom does not necessarily lead to a real estate market crash. While 21 housing busts have occurred since 1978, only 9 of them happened in the wake of a housing market bubble.

he study reached two other conclusions. The first was that those housing bubble bursts that occurred almost always followed significant distress in the local economy. In other words, even if a real estate bubble burst followed a home price bubble, the former may have had little to do with the prior run-up of housing prices but were aligned more with underlying economic factors. The second conclusion was that the manner in which a boom ends matters most to mortgage lenders and homeowners or investors. The most common historical way for a housing boom to end was through a period of price stagnation which allowed the local economy to catch up with inflated home prices.

The Corporation which insures and to an extent regulates the nations' banks has good reason to hope that it won't soon encounter the kind of real estate downturn that most recently occurred in 1990-1993. At that time the Corporation was forced to close some 300 banks, largely in the Northeast and California. This was merely the frosting on the massive savings and loan mess which forced closure of over 750 S&Ls throughout the Midwest and Southwest. FDIC initially had nothing to do with managing that ugliness which had its roots in agricultural and energy based loans although they did ultimately assume responsibility from the Resolution Trust Corporation for final liquidation of the assets of the failed S&Ls.

But the FDIC still had its hands full. The failure of the banks was largely due to their unbridled enthusiasm for real estate and FDIC inherited billions in real estate secured loans and bank owned (foreclosed) properties from the banks it closed. Clearing it all up took almost a decade and nearly bankrupted the bank insurance fund.

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